TREASURY Minister Anne Craine has revealed that the Isle of Man will lose 14 per cent of its annual income after accepting a reduced share of VAT revenues.
The news follows 10 months of negotiations between the Isle of Man Government and the United Kingdom over the VAT Revenue Sharing Arrangement.
The new arrangement will result in a reduction in the Isle of Man share of VAT and shared duties of £75 million per year.
Mrs Craine said the UK has agreed to make transitional payments to the Isle of Man this year and next of £45 million and £25 million respectively which would "allow for a measured and managed change".
In simple terms the new arrangement means that shared revenue will be reduced by £30 million this year, £50 million next year and £75 million the year after.
Mrs Craine said the Manx Government had to agree to the revised Revenue Sharing Agreement in order to secure the Island's Customs Agreement but said it was a "significant and most unwelcome reduction" which would lead to "challenging times for the Island into the future".
The Manx Government has been in negotiations since October when the UK Treasury advised that it wanted the agreement to be amended as it no longer accepted that the arrangements delivered, to the United Kingdom, a fair and equitable sharing of VAT and other duties.
Following the negotiations a new formula – the Tax Base Measurement Method (TBMM) – has been agreed by both sides. This will look at the Isle of Man's economy in terms of national income on a sector-by-sector basis rather than in totality.
Mrs Craine explained: "The reasoning behind this new approach is that in order to produce an Isle of Man share that is deemed 'fair' by the United Kingdom Government - there is a need to recognise that different sectors have different exposure to VAT and hence different capacities to generate VAT revenues.
"If the Isle of Man was just a scaled down version, a microcosm of the United Kingdom economy, this distinction would not matter. But our respective economies are different in structure. Most importantly for the purpose of the new approach we are proportionately more structured towards VAT exempt activity than the UK.
"The TBMM recognises the different VAT contributions arising from different economic activity and so calculates the Isle of Man share on a sector-by-sector basis and then adds these together to produce the Isle of Man total revenue share."
Mrs Craine said the next government in September would have "tough" decisions to make regarding the Island's future.
She continued: "We must remember that we do have a strong economy, we have the buffer of reserves to draw upon where necessary and we have a continued determination for the Island to develop and prosper.
"Government fully appreciates that the initial reaction to this revision and its financial implications for the Island will be one of concern, anger and may well create some uncertainty. So I will set out clearly and plainly why we have agreed to the new TBMM Revenue Sharing Arrangement.
"The new arrangement provides for certain -and not insignificant - income going forward which in turn will provide greater certainty and stability when rebalancing, planning and formulating our budgets into the future."
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